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Upper income taxpayers have been shouldering an increasingly larger share of the federal tax burden, and last week the Joint Committee on Taxation reported that 51% of Americans did not pay any federal income taxes in 2009, a fact that does not sit well with those already wary of deficit reducing plans that include tax hikes. Low wage earners, students, and the elderly are among the most likely to have no federal taxes due, but the 2009 figures are raising new questions about fairness in our federal tax system. Join us for a conversation about the federal tax burden.
- Chris Edwards Director, Tax Policy Studies, Cato Institute
- Howard Gleckman resident fellow and editor of TaxVox a fiscal policy blog, Urban-Brookings Tax Policy Center
- John McKinnon reporter, Wall Street Journal
Who Pays What in Federal Income Taxes
In 2009, slightly more than half of all Americans paid no federal income tax, which raises questions about fairness in the tax system. Who’s carrying most of the burden?
The Wall Street Journal’s John McKinnon reports that high-earning households are paying a growing share of federal taxes. “By one measure, it’s gotten to 45.1 percent of the federal tax burden for the top 10 percent of earners, and these are folks making over about $175,000,” McKinnon said.
There are many reasons why 51 percent of Americans don’t pay income tax. Among them are retirees or low-income individuals and families who simply don’t make enough money. But McKinnon says there are also a lot of people making up to as much as $50,000 per year who have no federal income tax liabilities – mainly because of various tax credits and deductions.
Tax Reform “Has nothing to do with the People at the Bottom
But Howard Gleckman, a resident fellow at the Urban-Brookings Tax Policy Center, says it’s the wrong question to simply ask who does and does not pay federal income tax. “Another way to look at it is who gets the most benefit from all of the tax preferences that litter the tax code,” Gleckman said. Viewed this way, it turns out that high-income people get far more benefit than poor people do, he says.
People at all income levels get tax benefits, but it’s the people at the very top of the income tax bracket that get the most, for things like capital gains and dividends, Gleckman said.
Chris Edwards, director of the Cato Institute’s Tax Policy Studies program, agreed that many of the current breaks in the tax code are geared towards people at the high end of the spectrum. “One way to think about tax reform is that tax reform really has nothing to do with the people at the bottom,” Edwards said.
Taxes and the Deficit
“I think we need to start at the point where we all recognize we’re going to need more tax revenue if we’re going to deal with the deficit issue,” Gleckman said. The question is, where should it come from? Gleckman suggests that one of the places to start is to scale back or eliminate some of the tax preferences currently in the code.
McKinnon added that the top 400 earners in the U.S. currently pay an average income tax rate of about 14 percent. “And that, I think, is maybe the big injustice at the upper end right now.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. In 2009, slightly more than half of Americans paid no federal income tax. This raises questions about the basic fairness in our tax system. Joining me to talk about how tax rates and breaks are distributed among wage earners, both up and down the income scale, John McKinnon. He's a reporter for The Wall Street Journal. Chris Edwards is director of tax policy studies at the Cato Institute. And Howard Gleckman is resident fellow at the Urban-Brookings Tax Policy Center. If you'd like to join us, call us on 800-433-8850. Send us your email to email@example.com. Join us on Facebook or Twitter. Good morning, gentlemen.
MR. JOHN MCKINNONGood morning.
MR. HOWARD GLECKMANGood morning.
MR. CHRIS EDWARDSGood morning.
REHMJohn McKinnon, in your piece last week, you reported that high-earning households are paying a growing share of the taxes. Give us a sense of the figures and why this is happening.
MCKINNONWhat's happening with high earners is that they are paying a higher and higher share of the federal tax burden. And by one measure, it's gotten to 45.1 percent of the federal tax burden for the top 10 percent of earners, and these are folks making over about $175,000. And that trend's just been going on for years and years, and there are a couple of things going on. One is that high earners are simply earning a lot more. People who make a lot of money in the United States make a lot of money. So, naturally, their share of taxes is going up. The other thing that's going on is that lower earners are paying less and less of the federal tax burden. And, as you can see, that's reflected by the fact that, now, 51 percent of American households don't pay any income tax.
REHMDon't pay any income tax. And who would that be?
MCKINNONWell, there are lots of folks in there that you would want to be in there. There are lots of poor people, people who are affected by the recession. These are 2009 figures we're talking about. And they're, you know, retirees. There are just lots of people who probably shouldn't be paying a lot of tax. But I think, increasingly, there's an uncomfortable realization that there are just a lot of people who are ordinary middle-class folks, folks who are making up to $50,000 or so, who gradually have been taken off the income tax rules.
REHMAnd earning $50,000 a year puts them at a place, perhaps because of family obligations and that sort of thing, where they don't have to pay federal income taxes?
MCKINNONWell, there have been just a series of breaks that have been adopted over the last 30 years or so. One of the latest was the Making Work Pay credit that was passed during the Recovery Act in 2009, and that's affected a lot of ordinary wage earners and helped them lower their tax bills. But there are also...
REHMHelp me to understand Make Work Pay.
MCKINNONMaking Work Pay was a credit that was created. It was an initiative of President Obama's during his campaign, and it -- it's designed to help really low-wage workers, you know, avoid slipping into poverty, particularly as we face this reality where American low-wage workers are really not making any ground whatsoever and, in fact, are, in a lot of cases, losing ground.
REHMJohn McKinnon, he's reporter for The Wall Street Journal. Howard Gleckman, you say that the question of who pays no income taxes is actually the wrong question. How come?
GLECKMANThat's right, Diane. It's a little bit of a trap when you look at who pays and who doesn't pay. Another way to look at it is who gets the most benefit from all of the tax preferences that litter the tax code. And if you look at it that way, it turns out that high-income people get far more benefit in terms of dollars and in terms of the effect on the amount of after-tax income they have than poor people do. So we calculated that people making less than $20,000 a year get about $1,000, on average, in tax benefits. People at the very top of the income distribution, people making more than $3 million a year, get $150,000 in tax preferences every year. So asking the question who pays and who doesn't pay misses those kinds of also interesting analyses.
REHMGive me a sense of some of the tax preferences you're talking about.
GLECKMANSure. And it's important to recognize almost everybody gets some tax preferences. At the bottom, it's the Making Work Pay credit that John was talking about. It's the earned income credit. It's the child credit. These are all tax preferences that, in some sense, operate as a welfare program. These are really spending programs that are operated through the tax code. They are ways to give low-income people government benefits. In the middle, it's the home mortgage interest deduction, the charitable contributions, the exclusion from employer-sponsored health insurance.
GLECKMANThese are all benefits that middle-income people enjoy. And then at the very top, there are tax preferences, of course, for capital gains and dividends. They benefit the most from those, also from deferred income, retirement income, that sort of thing. So it's across the board. Everybody gets a benefit.
REHMHoward Gleckman, he is at the Urban-Brookings Tax Policy Center. Chris Edwards, what do you make of all this?
EDWARDSI think Howard is right, that a lot of the breaks in the current tax code are geared toward the high end. And I think one way to think about tax reform is tax reform really has nothing to do with people at the bottom. It has to do with getting rid of the breaks at the top end. The mortgage interest deduction, the exemption from municipal bond interest to the state and local tax deduction, those are all slanted to folks at the very high end. Get rid of those and then you can lower the top rate. And that was part of the trick with the Tax Reform Act of 1986, which was a bipartisan plan that lowered the top rate to 28 percent, which is much below today's level, but it also got rid of a lot of deductions and cutback on preferences. So that's the way to go, I think.
REHMIt's all so complicated.
EDWARDSOh, that's -- it's enormously complicated, but the problem is members of both partisan Congress can't keep their hands off the micromanagement. They keep wanting to micromanage different industries and different types of families. Republicans push for things like child tax credits because that's sort of a socially conservative policy. And then liberals push for other sorts of, like, energy tax breaks and the like. So they've got to stop this micromanagement of society through the tax code, and I think that's what most people want.
REHMChris Edwards of the Cato Institute. I'm sure many of you feel strongly about the tax code. Give us a call, 800-433-8850. John McKinnon, what about this widening gap between those at the bottom or even in the middle and those at the high end? Why is that happening?
MCKINNONI think that's a really great question and one that, you know, we need to do better on. I'm not sure, though, that the answer really has that much to do with the tax system. I think when you look at before-tax incomes and then you look at after-tax incomes, you know, some people say, well, the gap should be closed more by what happens in that -- you know, in that process of paying taxes. But the truth is that the gap does narrow some, and I think that it's just hard to design a tax system that is going to really narrow that gap a lot. The experts who've looked at this at the OECD, for instance, concluded that the U.S. tax system is one of the most progressive in the world and maybe the most progressive in the world, and that means that, essentially, it's doing a decent job of trying to close that gap.
MCKINNONThe other conclusion that they come to is the tax system is just not a very good system to use for trying to narrow that gap. In other countries -- Western European countries, for instance, are much more progressive than the U.S. when you look at the totality of all their fiscal policies. In other words, when you look at all of the spending policies, their social safety net, they're more progressive. But when you just look at the four corners of the tax system, the U.S. actually looks pretty progressive.
MCKINNONAnd there are a few reasons for that. The rich are very rich here. The poor are, unfortunately, pretty poor. The U.S. also doesn't have a value-added tax, which a lot of Western European countries have. And value-added taxes are, unfortunately, kind of regressive, and this is something, I think, makes people in Western Europe a little uncomfortable. But the truth is the U.S. tax system, therefore, looks even more progressive because we don't have a value-added tax.
REHMAnd that value-added tax, Howard, would weigh more heavily on those at the bottom level.
GLECKMANBecause people at the bottom tend to spend more of their income than people at the top. Now, you can structure a value-added tax in such a way that you can address those problems. You can make it more fair across incomes. There are ways to, for example, provide large standard deductions for people, big exemptions. So you got to take care of that problem. A bad way to do it is to start exempting certain products because, once you start down that road, you'd have a very leaky system. You have a system that looks very much like state sales tax. That doesn't work very well at all.
REHMChris, from your perspective, is there any way to make this tax system a more fair representation of what we have in this country?
EDWARDSYeah, I mean, we've already discussed the fact that I -- you know, I think that a lot of economists, whether from the Brookings Institution or the Cato Institute, would get rid of a lot of these loopholes and deductions and lower overall marginal rates because everyone agrees that would be good for economic growth. I must say, a lot of the -- I think a lot of the change in who's paying taxes and are the rich getting richer and that sort of stuff in recent decades, it's not just driven by economic issues. It's driven by the changing family structure in America. There's a lot more dual-income earning families these days, which tends to skew the statistics.
REHMChris Edwards of the Cato Institute. Short break, and more discussion of the tax system, your calls, when we come back.
REHMWe are talking about the tax burden in this country, how 51 percent of the folks in this country are paying no taxes whatsoever, most of them at the bottom of the income level. Here with me, John McKinnon of The Wall Street Journal, Chris Edwards of the Cato Institute, Howard Gleckman. He's at the Urban-Brookings Tax Policy Center. John McKinnon, I want to come back to you. How does the percentage of the tax burden that wealthy people have compare to the percentage of the total income they earn?
MCKINNONI think, in general, high-income folks are paying a little bit larger share of the tax burden than they -- than their wealth has grown. It's hard to describe. But, basically, their tax share has grown faster than their wealth has grown over the last 25 years. That's a little bit surprising to me, but that's what the numbers that I've looked at show.
REHMSame numbers for you, Chris?
EDWARDSThe Congressional Budget Office looks at overall federal taxes paid -- income, payroll, excise. They add it all up, divide by income. They find that the top fifth of income earners in the United States pays, on average, 25 percent of their income in all these federal taxes, people in the middle pay 14 percent, on average. So it's true that high-income earners obviously make a lot of money, and that's part of the reason why they pay a lot of taxes. But, also, their rates are higher, and they end up paying a higher share of their income overall.
REHMBut how are you defining the middle class?
EDWARDSThe CBO looks at quintiles -- in other words, the top fifth and the middle fifth and the bottom fifth. So the middle fifth pays 14 percent in all federal taxes, the top fifth pays 25.
REHMBut, now, considering what you've just said, is that really a progressive tax?
EDWARDSWell, from my sort of Cato Institute perspective, it's too progressive. I think it's...
EDWARDSI think it's problematic when you start taxing people at the top end too much. I think people at the top end are extremely important to the economy. They are highly skilled people. They are brain surgeons and entrepreneurs and venture capitalists. You start taxing them too much, it seems to me, they take more leisure, they move their money offshore -- that sort of stuff. So we have to be concerned that we keep the level of tax burden down on everyone.
REHMBut what's going to stop that? If you take away some of these exemptions, like the housing mortgage deduction, what's going to stop those top earners from continuing to move money offshore, to continue to manage to save a huge amount of their wealth while still paying what looks like a goodly amount of taxes, but may not truly be there? Howard.
GLECKMANYou know, the first thing is, I think, we need to sort of start at the point where we all recognize we're going to need more tax revenue if we're going to deal with the deficit issue. We just are. Martin Feldstein, who's hardly a liberal, wrote a column the other day in The New York Times in which he started out by saying we need more tax revenue. So you have to start there. The question then is how do you get it? And I think Chris and I actually agree that the place you start is you eliminate these tax preferences. And you get it -- use some of that revenue to reduce tax rates, and use some of that revenue to help reduce the deficit.
REHMBut if you take away the mortgage deduction, aren't you hurting the middle class a heck of a lot more than you're hurting the upper earners, John?
MCKINNONYes, I think that's right. I think that the mortgage interest deduction is something that is enjoyed by many, many people in the middle class. And, in fact, the homebuilders are walking around Capitol Hill with a lot of studies...
MCKINNON...that show exactly that fact. I think what people at the very high end really benefit from are the breaks for dividends and capital gains. And that's something that, I think, gets lost a little bit in the shuffle. The top 400 earners in the U.S. pay an average income tax rate of around 14 percent, I think, and that's an unbelievable figure. And that, I think, is the -- maybe the big injustice at the upper end right now.
GLECKMANLet me take a little different perspective on the mortgage interest deduction. Canada, for example, has no mortgage interest deduction, and it has a homeownership rate which is higher than the United States. One can also argue that the mortgage interest deduction was one of the factors that encouraged the giant housing bubble we just had. And I don't know how you can say that middle class people had been helped by that housing bubble. So I think you can make a case that the mortgage interest deduction, at least as structured, is not good for housing, and it's not good for home ownership.
REHMAnd, clearly, you agree with that, Chris.
EDWARDSYeah, I agree with that, and -- but I would disagree with something John said. You know, the reason why capital gains and dividends has a lower rate at the individual level is because the money is already taxed at the corporate level. Corporate earnings are taxed, and the after-tax earning are paid out to individuals. I think a more egregious break at the top end is the exemption for municipal bond interest. I remember, when John Kerry ran for president, Teresa Heinz Kerry released her tax returns. She paid a very low rate. Why, because she had all of these completely tax-free municipal bond interest. So that's something that I would get rid of.
GLECKMANI'll disagree with Chris a little bit about capital gains. One of the proposals -- one of the common themes of the proposals from, for example, President Obama's deficit commission and some others, is actually taxing capital gains at the same rate as you tax ordinary income, but only when you've also reduced the rates on ordinary income. So, for example, Obama's commission reduced the top rate to somewhere in the mid-20s and also tax capitals gains at somewhere in the mid-20s. The truth is that a lot of corporate income is not taxed at the corporate level because it's sheltered overseas or other ways. A lot of companies are paying effective tax rates in the single digits.
REHMWhat about the trends with respect to federal taxes collected as a percentage of GDP? Do we have those figures?
EDWARDSWell, they're at low -- federal tax revenues are at low levels compared to GDP right now, but that's because the economy has been so week over the last three years or so. Once the economy starts booming again -- and I sure hope it does -- our revenues will rise to their normal level of around 18 percent or so of GDP. And that's where I disagree a little bit with Howard is, I think, you know, the problem in Washington, this trillion dollar deficit, is caused by this overspending and looking ahead at all the official forecasts. The revenues are where they're going to be historically. It's spending that's going through the roof, and I think that's the problem.
REHMSo one group says spending is going through the roof. The other group says taxes are going through the roof. You clearly need more taxes, from your perspective. Less from yours, more spending perhaps, from you, Howard?
GLECKMANNo. Actually, where I come down is I think we do need less spending. I think we have to get spending under control, but I don't think you can balance the budget simply on the spending side. And one of the reasons is because we do so much of what we used to consider to be spending through the tax code. So a lot of spending programs we normally want to get rid off are actually stashed away in the tax law.
REHMGive me an example.
GLECKMANWell, the mortgage interest deduction. We spend $100 billion a year subsidizing homeownership through the tax code. The child credit or an income credit are subsidies we give to low income people. I happen to think they're good. But we give them to low-income people through the tax code. So if you're going to say, we're going to eliminate certain government programs but just eliminate those that are on the spending side, all you're going to do is encourage people to load the tax code up with even more subsidies.
REHMSo, John McKinnon, how likely is it we're going to get any big important changes to the tax system in this Congress?
MCKINNONUnfortunately, I think, it's pretty unlikely. They may set targets. They may set targets in the process of reaching a deal on the debt ceiling. But, I think, beyond setting targets for revenues and spending for the next few years, I think it's kind of unlikely, unfortunately. Everyone seems to be really aiming for sometime in that 2013 to 2015 period for tax reform, but these things have a way of...
REHMWhy does it take so long when we've been talking about this for years? We've been talking about the unfairness in the tax system. It's simply got worse. Why is it going to take two or three more years to get this onto some kind of understandable and fair level, Howard?
GLECKMANDiane, I think this is really about politics. You're exactly right. We don't need to study the tax code anymore. I have on my bookshelf -- I'm sure that John and Chris have one on their bookshelves -- stacks and stacks of studies of the tax code. We know how to fix it. We're not yet ready to take the political steps we need to do.
REHMGive me your fix.
GLECKMANMy fix is really -- it really is fairly simple: lower the rates, eliminate as many preferences as you can get away with, you sum all the money you get from eliminating the preferences to pay for those lower rates, and you sum all the money to reduce the deficit.
REHMAnd your system?
EDWARDSA simple, you know, flat tax at 20 percent with a big exemption. As a first step, I would go to the Paul Ryan plan, which is two simple rates of 10 and 25 percent, get rid of all the deductions and loopholes.
REHMTen and 25 percent, how would that play out?
EDWARDSYou could design a system with two rates, 10 and 25 percent, as Paul Ryan has done, which essentially keeps the revenue and the distribution, if you want to call it that, of the current tax code. And that would be a step, in my view, toward a simpler flat tax across the board, which two dozen other nations have. Places like the Czech Republic have flat income tax, single rates.
REHMWhat would you do about sales tax?
EDWARDSWell, that's -- sales tax is their state tax. I don't favor a sales tax at the federal level.
REHMSo they don't -- okay. And how do you feel about Paul Ryan's plan?
GLECKMANI don't like it very much at all. Part of the problem is that what Ryan does is he exempts most capital income from tax, and I think that's probably not a very good way to do this. I do like...
REHMSort of leaves the rich, rich.
GLECKMANYeah, and I think that there's something to be said for lowering rates. I don't think that a flat tax is particular important, frankly. The rates are what matters, whether you have two rates or four rates -- doesn't add very much complexity. It's an easy way to make things a little more progressive by adding a couple of rates. So that doesn't bother me very much. But what bothers me very much about Ryan's plan is the distributional effects, which aren't very good. Also, we've done some analysis that suggests that Ryan's plan doesn't raise nearly as much revenue as he thinks it does. And, finally, it's important to note that in the House past budget, Ryan was very explicit in saying that he wanted to reduce the top rate to 25 percent.
GLECKMANBut he was extremely vague about exactly where -- which tax preferences he we going to eliminate to pay for it. In fact, he didn't mention a single one.
EDWARDSHe's right that Paul Ryan and many other politicians are too chicken to tell us exactly which exemptions they want to get rid of. I disagree with -- though, with Howard's characterization of Paul Ryan's plan as changing the distribution. You can -- Tax Policy Center has run their models on a two-rate system with the same distribution as the current system. And the reason is, again, because all those loopholes go to the top end. You get rid of the loopholes, you can substantially lower the rate, and rich people pay the same as they're paying now.
REHMChris Edwards of the Cato Institute, and you're listening to "The Diane Rehm Show." We're going to open the phones now, 800-433-8850. First, to the Florida Keys. Hugh, you're on the air.
HUGHThank you, Diane. We're talking about fairness? The system is incredibly unfair. I am a median income retiree. I've been paying taxes. I haven't missed a year for 50 years, and I'm still in the median income. And I pay over $5,000 a year, and that's based on pension and savings. Howard mentioned something about Europe being regressive. They did that on purpose. The European Union, when it was founded, one of the things they wanted to do is make sure everybody had a fair stake in the economy, so everybody has to pay. Nobody gets a free ride over there simply because of the national sales tax, the value-added tax.
REHMAnybody want to comment? Howard?
GLECKMANOne of the consequences of our incredibly complex tax system is tremendous cynicism about the tax code. Everyone out there believes they're paying more taxes than their neighbor because nobody really understands how the system works. So one of the arguments I always make about why we should make the system simpler and why we should get rid of these preferences is it becomes more transparent and you get much less cynicism about the tax laws.
REHMJohn McKinnon, do you really think that this system can be made more transparent?
MCKINNONI think it can hardly be made less transparent, so almost any change is going to be an improvement. I think that the caller makes a good point, that there are other systems that can be more transparent and also can pull more people into the system. I think that, again, one of the problems with our current system is there is just a vast gulf between the payers and the non-payers, and somehow those two have to be brought closer together.
REHMAll right. To James in Charlottesville, Va. Hi there.
JAMESHi. Yeah, I -- when the fact was mentioned that the top-income group in the country pay in excess of 40 percent of all the federal income tax, I have seen some studies that indicate that the top 1 to 2 percent of the people in the country, which I assume includes most of those, actually control between 90 and 95 percent of all the wealth in the country. So it would seem to me that they're kind of getting an awfully good deal if they're only paying 40 percent of the taxes. I'd like to have the folks make a comment on that.
MCKINNONWell, again, the numbers that we've looked at show that the share of tax paid by the upper top 10 percent, 20 percent has increased faster than their share of income has increased. But he's talking about wealth...
REHMBut he's talking about the top 2 percent.
MCKINNONAnd he's talking about wealth, which is a slightly different concept. And I think that it's probably true that wealth is accumulating at the top much, much faster for a combination of reasons than it is at the -- you know, for the bottom half.
GLECKMANYou know, we don't do a very good job of taxing wealth. We often, in fact, don't even try to tax wealth. There are issues about the state tax. There are issues about unrealized capital gains. If you buy stock in a company 20 years ago, own that stock for 20 years and don't sell the stock, you don't pay tax on it. That's the system we have. But it does a lot -- a whole lot of wealth to be accumulated and not be taxed.
EDWARDSThe vast majority of the very wealthiest Americans, they are not passive inheritors of wealth like the aristocracy in Europe. They are active, high-earning people -- venture capitals, entrepreneurs, Bill Gate, people who've added enormously to the economy -- so we have a very dynamic group of people at the top end. And they do a hell of a lot for the economy.
REHMChris Edwards, he is director of Tax Policy Studies at the Cato Institute. When we come back, more of your calls, your email, your Facebook postings and your tweets.
REHMWelcome back. We're talking about income taxes, and a number of you have asked me to clarify that, in fact, we are talking about income taxes. "What I believe," says Mark, "is that the income tax is not the only tax we are paying. If employed, we are paying a significant portion of income in payroll tax as a portion of the income of high-end earners is exempt. Low-income people also pay sales tax, excise taxes, property taxes, et cetera." So I should have clarified and said that.
REHMBut here's an email from Susan Marie, who says, "My husband and I paid more than $20,000 in federal and state income taxes last year on public employee salaries. We're raising two kids. Struggling to find the money for college makes my blood boil to think that some fat cat is buying another yacht instead of paying taxes while I support the government that makes their affluence possible. Why does the American public allow this? How do we change it? Taking away my mortgage deduction will make things worse for me, not better." Is that true, John?
MCKINNONAgain, I think that taking mortgage interest deduction away from a lot of middle-class people is really going to -- all things being equal, going to really affect their taxes a lot, yes. That's the biggest deduction that most people get.
REHMBut if you take that mortgage interest deduction away and you lower the overall rate of income taxes, federal income taxes, would that balance something out? That's the question, Howard.
GLECKMANIt could. And there's another proposal floating out there. President Bush had a tax reform commission which he ultimately ignored. But they proposed creating a credit -- turning the tax deduction for mortgage interest into a tax credit. And for a lot of technical reasons, when you structure something as a credit, low- and middle-income people do much better than upper-income people. So you don't have to get rid of the mortgage interest deduction. You can actually restructure it in such a way that it is more fair to low- and moderate-income people and less generous for high-income people who buy very large houses.
EDWARDSYeah, I generally agree with that sort of reform. I mean, one -- to enter a buzzword into the conversation here -- we talked about the taxes paid by different income groups. There's this issue of horizontal equity. Two families with the same income under our current system can often pay dramatically different levels of tax, which is hugely unfair. Why are homeowners favored over renters? In my view, that's unfair. A lot of people have to rent maybe 'cause they have to move around to different jobs and different cities, and we're forcing them to pay higher taxes than homeowners. So we can -- we should be able to -- we should not only level the taxes for different income groups, but level them across for people with the same income statement.
MCKINNONI was going to say that the credit idea makes a lot of sense for lower-income people and for moderate-income people. But, I think, when we're talking about benefits for the middle class, we really have to think about who we're talking about. A lot of people think of themselves as middle class when their family income is $150,000, $200,000. And I think that those people, on net, would have some questions about whether they're coming out ahead with a credit system.
REHMHow are we defining, in terms of income, the middle class?
GLECKMANThat's an interesting question. President Obama has defined it as households making less than $250,000.
GLECKMANIn many parts of the United States, households making $250,000 a year are not middle class. They're very wealthy.
REHMSo it depends on where you sit.
GLECKMANYeah, I mean, the median income is about $40,000. I mean, it's -- we have a very interesting definition of middle class among policymakers.
REHMAll right. Let's go to Roulo, Mich. Good morning, Sally.
SALLYGood morning, Diane. This is very interesting, listening to all of your guests speaking. And the more I listen, the more -- rather than fellows from institutes, they sound more and more like businessmen to me. When I hear things like, well, the tax code is very -- it needs to be more transparent. It's hard to understand. I'm a working mom, and I own a home. And it's not hard to figure. It's really -- the things that are hard to figure out are all the loopholes that they refer to that really don't have anything to do with the average American worker in this country.
SALLYAnd referring to why can't we do things like the Czech Republic or other European countries or Canada? One big reason is because none of the people that -- none of the citizens of those countries has to pay for their health insurance. They have socialized programs. Taxes should be looked at less as a business venture. And if they're looked at more as a patriotic or social venture, I'm sure you'll find -- you'll get a lot more cooperation. Things will make a lot more sense if we understand -- they're not giving. When I hear, we're giving subsidies in the form of child tax care, tax credit or mortgage -- no, this is our -- these are our tax dollars. We need to have a say in how they're spread around.
SALLYYes. There needs to be more diversity in how it's done. But it seems like every time there's a crushing dichotomy in how the taxes are paid -- and it's fairly obvious that it's the more wealthy that are getting away with a bigger break -- then suddenly everyone's taxes have to be refigured, and everyone has to relook at this. And a flat tax in this country? I don't think so. That's absolutely crazy.
MCKINNONI guess, one thought I would add here is that one big reason that Western European nations are able to afford nationalized health care is that they have very high taxes, and they -- particularly, they have a value-added tax, which they have used to subsidize their social welfare assistance.
REHMDo we know, for example, what Sweden's rate of taxation is? Isn't it almost as high as 90 percent?
GLECKMANNo. Sweden is actually -- the last 15, 20 years, they've moved substantially to the political right, and they actually abolished their estate tax. A lot of nations in Europe used to have annual wealth taxes, where they hit people every year. A lot of those have been abolished simply because of the realization we live in a global economy. Very high income entrepreneurs and the like can move their money around. So there's got to be sort of a reality-based tax system here. You have to consider the behavior of the taxpayers when you hit them.
REHMAll right. Here's a caller in Little Rock, Ark. Barbara, you're on the air.
BARBARAI have a problem with the figures that are being quoted on this show. As a former auditor of large mega corporations and extremely wealthy, I know for a fact that these people do not take the percentage of income tax you all have been quoted. Also, the lady before me, when we talk about child care credits -- and one of my big bombs is employee business expenses, which the Domino delivery guy can't take his automobile expenses as an expense on his tax return unless he owns a home. So we're having directly related business expenses -- in order for a lady to go to work, she has to pay childcare expense.
BARBARAThat's not -- if that were an employer or an individual with a business, that would be a direct deduction. And we're not treating these expenses of little people to go to work and business expenses like they should be.
GLECKMANYeah, I think the issue here is that if you take the standard deduction, if you do not itemize -- and most Americans do not itemize -- none of these tax preferences do you much good except for the refundable credits, the child credit or earned income credit. So it's really true. One of the issues that's always bugged me is, for example, charitable gifts. If you are very wealthy and you give a painting to an art gallery, you get to take a huge deduction. On the other hand, if you give -- throw a couple of dollars into the collection plate every week, which is -- you know, might be significant to your income, you get no deduction. So there -- you know, there are all kinds of issues like this.
GLECKMANOne of the reasons I keep saying that we could lower -- get rid of these preferences and lower the rates, if we lower the rates, we would give you more money, more of your after-tax money. And you could do with it what you wanted. If you wanted, as Chris said, to rent instead of own, you could do that.
MCKINNONI think the caller makes a good point, that there is a lot of tax avoidance by high-income earners, but I think it's also true that a very large percentage of high-income earners pay basically what they owe. And the data that we're talking about comes from IRS returns, and it shows that high-income people pay a generally much higher rate then lower income people.
REHMBut shouldn't they do that?
MCKINNONYes. It's their legal obligation, as well as their moral obligation.
REHMAll right. Let's go to West Lafayette, Ind. Good morning, Richard.
RICHARDGood morning, Diane. And good morning, folks. And I'll thank you in advance. I have, first, to comment. I don't remember who said it, but someone made the comment at one point that the process of paying taxes was the dues citizenship owes the country. Now, to get to my primary question and issue, given that and the fact that you've repeatedly stated Congress' micromanagement is part of the problem, and given the fact that the IRS makes law without the process of law and does so retroactively at their convenience, what makes you think Congress can actually make any change that is significant and helpful to the average person in tax law?
GLECKMANWell, in fairness to my friends at the IRS, they can actually make up the law. They have to do what the Congress allows them to do and the Congress requires them to do. I think the IRS often takes a bad rap for poor law that's written by the Congress. As far as what makes us think that Congress can do it, I think we're fairly skeptical that Congress can or least that Congress will.
REHMHere's an interesting email from Jay who says, "Then there are the poor saps like us, between -- who earn between $30- and $50,000 a year, single, with no children, who get killed by the tax code. We have no shelters for the income we earn. The very bottom and the top make out like bandits." Is that a fair comment, John?
MCKINNONYes. There is a -- there are many imbalances in the current U.S. tax system. But one of the big imbalances is for single people. They don't get breaks for children. They don't get breaks for education. There are all kinds of other breaks that are magnified by having children. And so, yes, that is a real problem. And I think that people are becoming more conscious of the imbalance that has occurred.
REHMJohn McKinnon, he's a reporter for The Wall Street Journal. And you're listening to "The Diane Rehm Show." To Dan in Louisville, Ky. Hi there.
DANHi. This is an interesting thing my grandma used to say. Figures lie and liars figure. I think we should get away from the concept of looking at how much a given income group pays as a percentage of their income. Earlier, one of the panelists said that the top 400 percent -- sorry -- the top 400 wage earners in the U.S. pay only 14 percent. But if the -- let's say, there's 300 million people in the country. One hundred and fifty million people pay -- are working. So 75 million -- you know, around half -- don't pay any federal income tax, so 400 people are paying more tax than 75 million people. I think what we need to do is really look at the check that the person has to pay to the IRS at the end of the year. And -- well, that's my point.
REHMAll right. Thanks for calling. Chris.
EDWARDSHe's coming back to the point that about half of the households now don't pay any tax.
EDWARDSAnd, you know, that is an issue because, I mean, taxes are really the price of government. We're sort of consumers buying government services here. And if people are getting this -- all these free goodies from the government and they're paying nothing, they're going to demand too much of it. So the price is too low for people paying more tax. So on -- we don't want to tax people below the poverty level. That doesn't make any sense. But, you know, the poverty level is 10 or 15 percent, and yet 50 percent aren't paying any tax. So there's -- something doesn't compute there.
REHMSomething doesn't compute. Here's an email from Paul in Green Cove Springs, Fla., who says, "With all the loopholes currently created by K Street lobbyists and their ilk, how can the average Joe believe that an overhaul of the tax system won't wind up even more skewed in favor of the corporations and the rich? It seems foolish to trust those who pass an unfunded Medicare drug plan, fight a war off the books, cut taxes in the midst of a war, and then whine about deficits and spending." Howard.
GLECKMANIn 1986, when Congress -- the last time Congress did tax reform, it actually raised corporate taxes to pay to reduce individual taxes. That tax plan was roughly a revenue and neutral. It didn't raise or reduce revenues below what it would have been before, and it did it by transferring revenues from the corporate side to the individual sides. So it's not impossible, but the caller isn't wrong. The lobbying industry is much larger than it was in 1986. And I think there's a serious question about whether or not a reform plan would get hijacked.
EDWARDSYou can always -- you know, I favor vastly simplifying the income tax code and moving towards something like a flat tax. But it's true, Congress could always come back and start micromanaging the code again. You know, what we need and how we got the 1986 tax reform plan was leadership by a president and leaders in both parties, on the Democratic side, Dick Gephardt and Bill Bradley and others, coming together and agreeing to simplify and lower rates. I don't that happening in Washington now. I do think that there's hope for reducing the corporate income tax. It's increasingly evident that there's broader support for corporate income tax reduction.
EDWARDSWe've got the highest rate in the world. That kills our multinational companies. They move their plants offshore 'cause of our high corporate tax. So President Obama and Republicans and Congress, I think, should be able to come to some sort of deal on the corporate income tax reduction.
REHMDo you agree, Howard?
GLECKMANI would rather not Congress dealt with the corporate income tax by itself. One of the reasons why is the vast majority of companies don't pay as corporations. They pay as individuals. Their owners pay on their individual tax returns. So I don't think it's a good idea to just do corporate tax reform alone. I would rather see this done as a package.
REHMAnd, John McKinnon, you don't think any of this is going to happen before 2013 or 2014?
MCKINNONIt's -- it makes health care look like a picnic, basically. It's that complicated.
REHMWhoa. Well, thank you all for this uplifting discussion. John McKinnon of The Wall Street Journal, Chris Edwards of the Cato Institute, Howard Gleckman of Urban-Brookings Tax Policy Center, thanks for being here.
REHMAnd thanks for listening, all. I'm Diane Rehm.
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